Why The Federal Reserve Just Might Never Stop Printing Money

They’re less apolitical than they should be…

The Federal Reserve System was created by Congress in 1913 as an apolitical institution designed to influence the supply of money & credit.

The Federal Reserve System was tasked with regulating financial institutions, serving as a banking & fiscal agent for the US government, and supplying payment services to the public through depository institutions like banks, credit unions, and savings & loans.

Structure & Functions of The Federal Reserve

The Federal Reserve’s structure comprises the Board of Governors in Washington, D.C., and 12 regional Reserve Banks. The Federal Reserve Chair is appointed, and in case this is all new to you, our current Reserve Chair is Jerome Powell.

The Fed’s three functions are to:

1. Conduct the nation’s monetary policy.

2. Provide and maintain an effective and efficient payments system.

3. Supervise and regulate banking operations.

All 3 are essential for a nation, however, citizens mostly interact with the Fed’s monetary policy. This encompasses any strategic actions taken by the Federal Reserve to influence the supply of money and credit in order to foster price stability & maintain maximum sustainable economic growth.

The trouble is, the Federal Reserve can only be so effective at reducing uncertainty when we’re facing a global pandemic and a jobs crisis comparable to the Great Depression.

Their Unwavering Statement

In 2008 when Ben Bernanke was quick to flip between optimism and pessism with the economic recovery — frequently calling to curb quantitative easing efforts before succumbing to the market’s reaction and expanding the program.

How about now?

The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.

Jerome Powell doesn’t have a PHD in Economics keeping him up at night, so he’s a little more straightforward. And unfortunately, despite the statement below, it’s clear that by printing money and cutting interest rates, one can drive the stock market up.

The question is if Jerome Powell and the rest of the Federal Reserve is allowing the stock market’s performance to serve as a personal barometer for their policies — which would be terrible.

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system.

What’s This Mean?

In short, money is cheap. Relaxed monetary policy will keep interbank lending rates (the federal funds rate) between 0.00% and 0.25%, meaning that everything from car loans to mortgages will cost less.

The problem? In such a high risk environment with so much uncertainty, banks aren’t giving mortgages. Lower rates are not giving mortgage demand any significant boost, except when it comes to higher-end homes, because… oh yeah: 1 in 4 Americans has lost their job.

So while low rates has driven the major indices close to pre-Covid levels, that doesn’t translate into much for everyday Americans — except even lower rates on their Savings Account.

Limitations of Federal Reserve Money Printers

While the Federal Reserve may be responsible for doling out stimulus funds, they can’t create workforces or suddenly pass an Infrastructure Spending Bill which puts Americans back to work.

Instead, it must lend money to support the private sector, even if the private sector doesn’t feel like supporting the average American is worth the risk. Although the Fed’s injections into bond and treasury markets has been essential, if the billions of dollars can’t create economic activity, and are rather used as a stopgap to stave off the inevitable?

That in turn will slow the recovery, if not cause an outright reversal as stimulus funding quickly dries up in Q3 and Q4 of 2020.

And through it all, economic data will show a struggling economy, and the Federal Reserve’s statement is pretty clear: They’ll keep printing money until we see a recovery (and leave it to the economists of the future to debate how effective they actually were).